What Types of Crypto Derivatives Are There?

09 Jan 2023

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In the traditional market, a derivatives contract refers to a type of financial instrument that tracks the price of an underlying asset, allowing investors and traders to get exposure to an asset without having to actually own it. These underlying assets can be government bonds, interest rates, stocks, fiat currencies, etc.

The same concept applies to crypto derivatives. This means that a Bitcoin derivative will rely on the value of the price of Bitcoin. But why use crypto derivatives (or traditional ones) when you could buy the underlying asset instead? Well, derivatives come with multiple benefits, including but not limited to:

  • Hedge against financial risks by opening contrary positions in different assets
  • Broader access to more assets and products
  • The ability to use high leverage
  • The ability to gauge an asset’s price more efficiently to avoid slippage

What are Crypto Derivatives? Overview

Just like the traditional market, there are different types of crypto derivatives, most famously: crypto futures and options. There are also perpetual contracts, which are a unique type of futures in the crypto market.

Crypto Futures

Simply put, crypto futures are an agreement between two parties: the buyer and the seller.

The contract states that the buyer purchases an underlying asset at a future date (hence the name), and the seller of the contract is obligated to sell and deliver the asset accordingly. The seller is usually an exchange that posts the profits or losses from the trade on the trader’s account.

There are two common ways to go with crypto futures:

  • Going long: the trader believes an asset will have a higher market price in the future.
  • Going short: the trader believes an asset will have a lower market price than the set price.

Crypto Options

Crypto options are similar to futures, giving the trader the right but not the obligation to buy/sell an underlying cryptocurrency at a current market price (known as the strike price) until the expiry date. In the crypto and traditional markets, options convey a higher level of risk and are used mostly to speculate with high leverage.

There are mainly two types of options, call options and put options. The first refers to when a trader buys an asset on a given date, while the latter gives the trader the ability to sell the asset on a given date as well.

Crypto Perpetuals

A perpetual contract is the same as a futures contract but without expiry date. This means the party can stay in their positions as long as they wish. But this also means losses can be magnified if the position is leveraged and without margin calls.

Where to Trade Crypto Derivatives?

There are multiple exchanges that offer crypto derivatives. A popular option is Redot, a crypto exchange where users can trade Bitcoin and Ethereum derivatives with portfolio margin.

Redot offers a wide array of products and services besides crypto derivatives, including

  • ETH 2.0 staking starting with a minimum of 0.01 ETH and no fees
  • An educational blog for and a newsletter
  • A fix and rest API for developers

Redot is a custodian exchange, meaning users can store their crypto funds, which they can deposit using VISA, bank transfer, crypto transactions, or SEPA. The exchange also offers a high degree of security with multi-signature wallet custody with cold storage and monthly audits.

Featured image via Pexels.



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